Singapore Strategy - What Now After Brexit Rebound?

The FSSTI’s recent bounce suggests the market has brushed off fears over Brexit.

However, we remain relatively cautious as macro risks remain elevated and earnings visibility is limited.

Position selectively given the limited upside to our year-end FSSTI target of 2,910.

WHAT’S NEW

Strong rebound after Brexit.

Following the news of Brexit on 24 Jun 16, the FSSTI retraced 3.2% before rebounding and closing 4.2% higher than pre-Brexit levels. This report highlights our latest views and picks following the strong market rebound.

As an indication, some of the defensive picks we had highlighted in our RMN dated 27 Jun 16 have risen by up to 23% (China Aviation Oil).

Our other large-cap picks are up 7-12% since our previous RMN update on Brexit.

ACTION

 Economic/financial impact from Brexit.

While it would be difficult to quantify the potential economic implications from Brexit, the exposure of Singapore to slower economic growth from the UK or EU would be meaningful.

As an indication, the EU accounts for 11% of Singapore’s exports (5M16). Singapore also receives about 6-7% of its foreign direct investments (FDI) from the UK (2013-14).

 Stocks with exposure to the UK.

Within our coverage, companies with exposure to the Eurozone include Ho Bee (24% of GAV in UK), City Dev (12% of GAV in Europe, 11% in UK), ART (28% of GAV in Europe, 11% in UK), and FHT (24% of GAV in Europe, 19% in UK).

On the income side, a 10% depreciation of the pound against the Singapore dollar will result in a 0.5-2.9% negative impact on earnings.

Transportation companies with exposure include ComfortDelGro (CD) (25% of revenue from Europe. Out of that, 88-90% is from the UK bus segment, of which’s revenue remains resilient). For SIA, Europe accounts for 9% of its group revenue but euro-denominated revenue is likely to be less than 4% of total revenue. Any negative impact from a weaker Euro could be partially offset by higher traffic to the region. In the near-term, yields could fall, but the medium- term impact would be negligible as SIA could hedge its exposure.

 Tactical trade by picking laggards in this rebound.

Within our coverage, laggards in the recent rally include Ascott Residences Trust, City Developments and Ho Bee Land.

Oil services stocks have also been significant underperformers but we believe this is attributable to weaker oil prices during the period as well as concerns over the balance sheet of some of these stocks.

Our tactical BUYs for laggards include Ho Bee Land, City Developments, Bumitama and First Resources. The latter has been underperforming recently given its weaker-than-expected results but we expect First Resources to register a 10% qoq rise in earnings in the upcoming 2Q16 results on higher CPO prices.

 Maintain OVERWEIGHT on REITs.

Top picks: ART, AREIT. Rising expectations of a prolonged low interest rate environment amid increased uncertainties as Brexit unfolds will lead to continued interest in REITs in Singapore. The increase in required returns for UK/Europe exposure is more than compensated for by built-in buffers and the drop in the risk-free rate.

We prefer REITs with exposure to the hospitality and business park segments. The hospitality segment’s re-rating has been underpinned by a pick-up in visitor arrivals, while there is hardly any supply of business park space moving forward.

We recommend switching to Ascott Residence Trust as a laggard play in the hospitality segment post CDREIT's strong outperformance, and prefer Ascendas REIT for its business segment exposure.

 Fairly valued after recent spike and inclined to top slice.

The FSSTI is currently trading at 14.6x 2016F PE and a P/B of 1.22x.

On a PE basis, the FSSTI is trading at a small 5% discount to the long-term mean but we think a discount is warranted given the uncertain outlook ahead. We see the likelihood of more earnings downgrades and with the mixed external outlook and we would adopt a relatively defensive stance.

In our view, the wider implications of Brexit may not have been fully factored in as the rise in risk premium has been brushed aside by expectations of further monetary easing. However, we are less sanguine given the weaker global growth.

In addition, we see a lack of positive catalysts, which could suggest a range bound market for the remainder of 2016 and we would prefer to buy on pull-back or specific stocks with catalysts.

 “Sniper” approach for 2H16 to outperform.

Our picks include Singtel, City Developments, DBS, STE, ART, First Resources and Bumitama.

Stock analysis research and articles on this site are for the purpose of information sharing and do not serve as recommendation of any transactions. You will need to make your own independent judgment regarding the analysis. Source of the report is credited at the end of article whenever reference is made.